4 Ways to Protect Your Financial Freedom

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By Liz Pulliam Weston

An illness, a wreck, a misstep on a ladder -- here's how to shield yourself from
life-changing trouble.

You've made the decision to abandon the corporate world and are about to pull the
trigger on your plans for financial freedom -- or maybe you're still in the dreaming
stage. Either way, you're putting your finances in order, drawing up spending plans
and realigning investments for your post-9-to-5 life.

Sounds idyllic, but all of your plans for financial freedom could be scuttled if
you don't guard against catastrophe. Get in a serious car accident, contract a disabling
illness or fall off a ladder while cleaning your gutters, and you could find yourself
wiped out.

To protect yourself and your dreams for the future, here are four types of insurance
you should at least consider. Two of these -- health and umbrella liability insurance
-- are pretty much no-brainers for most people. The other two are important but
tend to be expensive. Here's what you need to know.

Health insurance: Consider catastrophic coverage

Even if you're young and healthy, health coverage is a must-have. One accident or
illness could wipe out everything you have or land you in bankruptcy court. If your
employer is one of the 40% that don't offer health insurance, or if you're self-employed,
catastrophic insurance is one way to protect yourself.

You also should consider it if you're about to retire early. Few companies (about
4%) offer retiree health benefits anymore, and Medicare doesn't start picking up
your medical bills until you're 65.

Catastrophic coverage has high deductibles and low monthly premiums. Most policies
make you pay for the first $1,000 to $5,000 in medical bills, but then cover everything
over that up to a limit, typically $1 million to $3 million. Instead of costing
$300 to $500 a month for two people in their 30s -- the typical cost for traditional,
lower-deductible plans -- catastrophic policies cost closer to $100 to $200 a month.

The costs increase the older you are, but catastrophic coverage will still be less
expensive than the alternatives. A couple aged 55 could pay more than $1,200 a month
for a traditional medical plan, while a high-deductible plan will cost about $500.

As with most insurance, it pays to shop around. Contact several companies for quotes,
or use an independent insurance agent who can help you comparison shop.

Umbrella liability insurance: Peace of mind

This type of insurance protects you if you are sued or cause damage to someone else.
Your homeowners and auto policies have liability insurance built into them, but
the coverage may not be sufficient.

The typical auto policy, for example, has a maximum liability limit of $300,000
per accident, although your limit could be as low as $15,000 if you bought a bare-bones
policy. If you cause an accident that results in $1 million of medical bills for
someone else, you could be sued for the difference.

The answer is: It depends. If you're married with kids, you have different needs
than if you're single with no dependents.

That's why insurance experts recommend that you have liability insurance equal to
at least twice your net worth, if you're highly paid or seen as a possible lawsuit
target (if you're a doctor, a lawyer or any kind of public figure).

Most auto and homeowners policies have an upper limit of coverage of $500,000, so
if you need more coverage, you'll probably need to buy a personal liability policy.
This so-called umbrella policy extends over your existing coverage like an umbrella,
kicking in after your auto or homeowners coverage is exhausted.

Umbrella policies are one of the best-kept secrets in the insurance world. They're
relatively inexpensive, so insurance agents don't make much of a commission selling
them. But for $150 to $300 a year, depending on where you live, you can get $1 million
of coverage -- and peace of mind.

Disability insurance: Replace your income

You may think your biggest asset is your house or your 401(k), but actually it's
your ability to earn money. And chances are, you don't have enough protection should
you become unable to work for more than a few weeks.

Your state's workers compensation fund, for example, usually provides benefits only
if you get hurt on the job. Your employer probably provides some kind of short-term
disability coverage, but the checks will end after three months to a year. If you
can't work for longer than that, Social Security may provide some benefits -- but
only if you're so disabled that you can't hold any job.

So unless you don't mind switching from your current career to one flipping burgers
or telemarketing, you probably want to have a long-term disability policy.

Unfortunately, if your employer doesn't offer it, you may find that a long-term
disability policy is expensive or tough to get, said Raymond Parry, an account executive
with James P. Bennett & Co. in Santa Monica, Calif. A 35-year-old white-collar worker
needing a $5,000 monthly benefit would pay at least $2,500 a year for an individual
policy, and that's assuming she's in perfect health, Parry said. Some people who
try to get policies on their own, Parry said, find they don't meet the disability
companies' strict underwriting criteria.

It's much easier to get a policy through your employer, if that's an option. About
30% of the nation's workers have long-term disability coverage through their jobs,
U.S. Department of Labor statistics show. Either their company pays for the insurance,
or the worker can buy it at relatively reasonable group rates. The larger the company,
the more likely it is to provide this coverage, said Joseph Luchok, spokesman for
the Health Insurance Association of America in Washington, D.C.

If your employer doesn't offer the coverage, or if you're self-employed, your next
best bet is to see whether you can buy a policy through one of the professional
or trade organizations to which you belong. If not, you can try to form your own
group of at least 10 people to qualify for a discounted rate, Parry said. The insurance
agent said he has formed such groups for small-business owners who didn't have enough
employees to qualify for group rates on their own.

If your only option is buying a policy on your own, make sure to get enough coverage.
Most insurers won't provide benefits that replace more than 60% to 70% of your income,
but opt for the highest percentage you can get. You can buy policies that cover
you for the rest of your life, but they're often prohibitively expensive; look for
one that pays benefits until age 65.

You'll need to go through an agent or broker, so pick one who does a lot of this
business and keeps up to date with the insurers' ever-changing policies.

Long-term-care insurance: Safeguard your legacy

Long-term-care insurance is a relatively new product, and financial planners are
still arguing over who really needs it. Some say this coverage can both preserve
your assets and ensure that you receive high-quality care. Others say you're better
off skipping these policies and using the money to build your retirement funds so
that you can pay for care directly.

That debate won't be solved here. But here are some things to think about:

First, if you're younger than 50 or have more than $1 million in assets, you probably
don't need to worry about this coverage. If you're older than 50 and have $100,000
or more in assets, however, you might want to at least consider it.

Long-term-care insurance covers the costs of serious illness that aren't picked
up by regular health insurance or Medicare, the government health program for people
over 65. If you can't properly feed, clothe or bathe yourself and need an aide to
help you, long-term-care insurance pays the bill.

Long-term care can be expensive: Figure at least $60,000 a year for nursing-home
care, and more for care provided at home. Most people need long-term care for two
years or less, although 8% of people spend five years or more needing help, according
to figures from the Congressional Budget Office.

People who have $1 million or more of assets probably can pay for their own long-term
care, although some people buy the policies anyway to ensure that their care doesn't
eat up their children's inheritance. Preserving an inheritance is also the reason
some people buy policies for their parents.

At the other end of the economic spectrum are people who are simply too poor to
pay for coverage, which typically costs $500 to $2,000 a year. If the premiums cost
more than 7% of your gross income, says long-term-care expert Bonnie Burns, you
shouldn't even bother with this coverage. If you're truly indigent, you'll most
likely end up qualifying for Medicaid, the government program that pays for nursing-home
care for the poor.

Experts disagree about when to buy the policies as well. You'll pay less for coverage
if you buy it while you're young (age 40 or so -- you usually can't get a policy
at a younger age). But the savings may be moot because you're likely to pay for
the policy for many more years before you actually need it.

Buy the policy too late -- after 65, say -- and you'll pay a lot more. Monthly premiums
for a 65-year-old can be two to three times higher than the same policy for a 50-year-old.
Although recommendations vary, the best time to buy long-term-care insurance seems
to be between age 50 and 60.

If you're interested in buying a policy, be prepared to do your research. Start
by asking your state Department of Insurance for its buyers guide to long-term care
insurance. Most states produce one, Burns said. The National Association of Insurance
Commissioners also produces a "Shopper's Guide to Long-Term-Care Insurance," which
you can order for free.

You might also be able to buy a policy through work. Only 12% of employees have
the option now, but that is expected to grow "due to an aging population and baby
boomers who will be increasingly likely to take care of aging parents," said EBRI
analyst Ken McDonnell.

Insurance products offered through CCO Investment Services Corp. In Massachusetts, insurance is offered through Citizens Financial Services Insurance Agency. In New York, insurance is offered through Citizens Insurance Agency of New York Inc.

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